Japan said to eye extending tax break on capital gains

BALANCING ACT:Consideration of leaving the tax level at 10% is aimed at maintaining confidence in the country’s economic recovery, but public debt looms as a major issue

Bloomberg

Japan may extend a capital-gains tax break by a year after the Japanese Financial Services Agency opposed ending it next year as scheduled, according to two Japanese government officials familiar with the matter.

Japanese Vice Finance Minister Fumihiko Igarashi, who moderates the tax panel that will make policy recommendations to Japanese Prime Minister Naoto Kan, said last month he wanted to end the 10 percentage point break for levies on dividends and capital gains. Japan’s banking regulator has rejected the proposal, citing the potential effect on stocks, said the officials, who spoke on the condition of anonymity because the talks were private.

DUAL OBJECTIVE

The discussions reflect policy makers’ dual objectives of reining in the world’s largest public debt burden, while sustaining confidence in a recovery from Japan’s deepest postwar recession. Igarashi has favored bringing the tax back to 20 percent from 10 percent, a step that might make it easier to avoid having to sell more deficit--financing bonds next year.

“This is good news for -investors, but it’s important to keep in mind is that it’s not clear the tax break has been encouraging people to buy stocks,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal situation is so severe that they are going to need to end the tax break eventually.”

Toshiharu Mashita, a Financial Services Agency spokesman, confirmed that his agency wants an extension of the reduced tax rate.

OUTLOOK CONCERNS

“We are asking to extend the equities tax break because of concerns with the outlook for economy, which remains in a severe state, as well as finance,” he said.

The benchmark Nikkei 225 Stock Average has advanced 9 percent so far in the fourth quarter, helped by a halt to the yen’s appreciation against the US dollar and signs of stabilizing growth in the US and China. The index added gains after the news on the tax-policy discussions, and was up 0.8 percent at 10,293.89 at the close yesterday.

PREVIOUS EXTENSION

Japan’s government has previously extended the tax break, in the wake of the global financial crisis, a move that pushed its expiration to next year from 2008. Implemented in 2003, the measure was originally scheduled to last five years. The government tax panel plans to compile tax guidelines this monthy for the year starting April next year.

SMALL INVESTORS

The Finance Ministry had proposed bolstering tax benefits for small investors to help offset the effect of repealing the tax break.

Kan’s government is struggling to halt growth in a government debt level estimated by the IMF at 226 percent of GPD this year. His party lost ground in an upper house of parliament election in July after Kan favored discussing an increase in sales taxes.

Japan’s new bond issuance of ￥44.3 trillion (US$527 billion) for the fiscal year through March this year, is expected by the finance ministry to exceed tax revenue.

OTHER REDUCTIONS

The tax panel is also debating a reduction in income-tax deductions and an inheritance tax break, and scaling back the scope of a pledge to increase childcare handouts.

A further area for potential changes is corporate taxes, where officials are discussing a reduction to help make Japan more competitive.

Japanese Finance Minister Yoshihiko Noda said this month it would be “difficult” to reduce the effective corporate tax rate by 5 percentage points without coming up with revenue sources to compensate for the lower income.